It's going to be tough to replicate the returns of 2021, says portfolio manager

Industry insider expects inflation to run at 3.5% to 4%, but urges investors to watch for how policy-makers' moves impact market

It's going to be tough to replicate the returns of 2021, says portfolio manager

Candice Bangsund, the Vice President and Portfolio manager of Global Asset Allocation at Fiera Capital, expects 2022 to be a challenging year for equity markets with inflation also continuing to run strong at 3.5% to 4%. She beleives that policy-makers’ response to this scenario will dictate how the economy and financial markets will do in that environment.

“The risk is that the central banks will panic and step in and start raising rates aggressively and actually derail the economic recovery,” she said. “At the same time, consumers could start pocketing their money and stop spending, given the erosion of purchasing power.

“We’re not seeing that yet. The consumer continues to spend. There’s a lot of saving and pent-up wage gains, which are allowing consumers to continue spending, even in light of higher prices.”

She also warned that, if policy makers start raising rates more aggressively than anyone anticipated, it could moderate or slow growth and the high inflation could be detrimental, not only for the stock markets, but also the bond markets.

Bangsund added that government bonds would not protect investors in that environment, so portfolio managers would to reinforce the stability in portfolios and real estate, infrastructure, and agriculture could all perform well in that environment without the added volatility of going into a REIT or infrastructure ETF.

She also noted that while the equity markets have seen a lot of volatility in the last few months, it has been a great year for equities, which are sitting at near-record levels. She said they continue to return higher, even in light of a lot of risks heading into the new year.

“We think that 2022 is going to be a little bit more challenging from an equity market perspective, and it’s going to be tough to replicate the returns that we’ve seen in 2021,” said Bangsund. “It seems that the fundamental tailwinds that previously supported equities are deteriorating, and the downside risks may be starting to outweigh the potential for positive surprises, particularly given that equities are trading at such lofty evaluations. So, there’s just a lack of an obvious catalyst that’s going to drive these types of returns going forward.”

Noting that the continued waves of COVID variants circulating the globe have brought the strength of the recovery into question, even though each subsequent wave seems to be less destructive from an economic standpoint, she said, “it still has the ability to weigh on investor sentiment and just create a little bit of angst, a little bit of volatility.”

Despite the current headlines, she remained optimistic that the global economy would remain firm going into 2022, but she said her sense is that the strong earnings recoveries have largely been priced into the market and might be a little lofty, so inflation could cut into those profit expectations going forward.

But, she also said that, while she doesn’t expect policymakers to go into a restrictive mode, “it will take years to get to neutral from here and the incremental withdrawal of policy support tends to inject a little bit of uncertainty and volatility into the market, just the transition from ultra-accommodative emergency level stimulus to something less so.

“With so many factors going into the new year,” Bangsund said, “we think it’s going to be a more challenging environment and more muted equity market returns in the next 12 to 18 months.

“The market is likely to be able to tolerate a little bit of tightening, up to a certain point, so in the next 12 to 18 months, I don’t think there’s a risk to that outlook. We do not see a recession in the next three to four years, given this landscape and the fact that it is going to take policy makers a long time to get back to that neutral, and even restrictive, policy positioning. So, it’s still a pretty favorable economic backdrop long-term, but from an equity market standpoint, the easy money has been made and I think it’s going to be a little bit more challenging.”

Bangsund said that’s similar to what’s recently been happening on the equity market with markets down in September, rebounding in October, and down again in November, although they’re running higher again.

“I think it’s just going to be that choppy and uneven trading as investors digest the headlines about the virus and the policy response to high inflation,” she said. “So, these are going to be the key factors to keep an eye on, but there are opportunities in the market, given the environment.”